Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A cost that affects a third party who did not choose to incur that cost, leading to market inefficiency.
B
A benefit received by a third party that does not pay for it, enhancing market efficiency.
C
A government regulation that ensures all market participants face the same costs, improving efficiency.
D
A pricing strategy that maximizes profits for firms while ensuring fair market competition.
Understanding the Answer
Let's break down why this is correct
Answer
A negative externality is a situation where the actions of one party have harmful effects on others who are not involved in the transaction. For example, if a factory pollutes the air while producing goods, people living nearby might suffer from health problems without having any say in the factory's operations. This can lead to market inefficiency because the factory does not pay for the harm it causes, resulting in overproduction of goods and too much pollution. When the true costs of pollution are not included in the price of the factory's products, consumers might buy more than what is socially optimal. Therefore, addressing negative externalities is important to ensure that both producers and consumers consider the broader impact of their actions on society.
Detailed Explanation
A negative externality happens when someone suffers a cost without choosing it. Other options are incorrect because This option confuses benefits with costs; This option suggests that government rules fix costs for everyone.
Key Concepts
market efficiency
Topic
Negative Externalities and Market Efficiency
Difficulty
easy level question
Cognitive Level
understand
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